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The liberalization
of Indian economic policy, de-regulation of key sectors and progressive moves towards
further integrating India with the global economy has been a key driver of
increased IT adoption in the country

2012 will be remembered as a landmark year in the history of Indian
Information Technology- Information Technology Enabled Services [IT-ITeS]
industry, as aggregate industrial revenue crossed USD 100 billion dollars with
a y-o-y growth of 14 percent. With USD 69 billion, exports [excluding hardware]
contributing the lion’s share of 78 percent, accounted for the growth of +16
percent over 2011. The domestic revenue [including hardware] is expected to
account for USD 32 billion, a growth of +9 percent over 2011. There is no doubt
that IT-ITeS industry has emerged as one of the most dynamic sectors in India’s
economic boom and is responsible for the global recognition of India as a “soft”
power. The consistent growth of the IT segment has created phenomenal wealth,
employment, exports and a significantly large reservoir of highly competent
technocrats and knowledge workers.

Majority of the Fortune 500 and Global 2000 corporations are
sourcing IT/ITeS from India. Further most of Capability Maturity Model
(SEI-CMM) Level 5 firms are based in India. On the plus side, the Indian
IT-ITeS industry has also moved up the value chain of global perception. India
is delivering several mission critical services to clients globally. Indian
companies have set up delivery centres across the world and are actually
providing services from different regions. 340 delivery centres in 184
cities across 48 countries in 2007 have now increased to over 560 centres
in over 200 cities across 70 countries by 2012. India is fundamentally advantaged
and uniquely positioned to sustain its global leadership position, grow its
offshore IT-ITeS industries at an annual rate of 13-14 percent, sustain nearly
10 million direct jobs and generate export revenues of about USD 175 billion
by 2020. This represents an opportunity capable of catapulting India into a
higher growth orbit.

Evolution of the
Indian IT-BPO Industry

Before venturing into the alley of Future Vision it would be appropriate
to rewind and dwell on the birth and various life stages of this sector. The
Indian IT Services Industry has undergone many changes over the last decade but
has become a globally recognized success story. The evolution of this industry
can be categorized into three broad phases.

Phase 1: Emergence (1998 – 2000) – Post 1998 the industry came into its own with Software and
Internet Services seen as the new growth engines. The first Offshore
Development Centres were set up to provide low cost/high quality IT services
from India-based locations. The industry grew at a scorching pace, recording
almost 50 percent CAGR. Growth to India was driven by IT services spurred by
the Y2K phenomenon, focused largely on Application Development & Maintenance
(ADM) and software R&D services.

Phase 2: Resilience (2001 – 2005) – The end of 2001 brought with it the dot com crash and a host of
new challenges for the industry. While the sentiment and view of ‘technology’ services
post the crash was extremely negative, Indian IT Services Companies proved
their resilience by realigning their service offerings to serve geographical
and vertical markets. In particular they took advantage of the need for technology
cost saving in the US and Financial Services vertical to maintain an extremely
strong CAGR of ~37 percent.

Phase 3: Dominance (2006 – till date) - Driven by relentless growth, 2006 was the year which saw Indian
IT Services Companies cement themselves as a force to be reckoned with. Backed by
tremendous growth in offshore adoption and strong sustained demand from
favoured areas such as the US and BFSI, five Indian companies racked up in
excess of INR 45 Billion in revenues. Growth of BPO services and more recently,
offshore delivery of IT services such as package implementation/systems integration,
as well as remote IT infrastructure management have witnessed increased buyer adoption.
Multinational companies aiming to replicate the offshore services model have
rapidly scaled up in India. With core geographies (US) and core verticals
(BFSI) nearing saturation, the industry has looked to develop new geographies such
as Continental Europe and new verticals such as manufacturing, healthcare and
retail. Additionally, increased focus on cost efficiencies and customer satisfaction
has helped the industry to rapidly evolve from a provider of project based development
activities to an “end to end” solutions provider.

While the sector has maintained CAGR of over 30 percent in the tenth
plan (2002-2007), the IT-ITeS industry has continued sustain growth rate in the
Eleventh Plan (2007-2012) despite the global economic downturn, which has impacted
the growth trajectory of the industry to single digits in FY 2009-10. With world
wide technology spending declining significantly in 2009, and it being an
export led sector with a key thrust on banking and financial services, there
was single digit growth in export revenues.

The industry in this phase (2008- 2010) has demonstrated
maturity by reducing costs, focusing on new markets, investing in sales and development,
domain expertise, enhancing operational excellence and thrust on customer
centricity. Thus, there has been a marked improvement in FY 2010-11 and FY
2011-12.

The Stimulating
Strengths

This unparalleled success saga has emerged from a tapestry of myriad
factors.

The liberalization of Indian economic policy, de-regulation of key
sectors and progressive moves towards further integrating India with the global
economy has been a key driver of increased IT adoption in the country.
Government of India has played a key role in supporting development of this
sector. From providing tax incentives under Section 10A/10B, setting up 52
STPI centre across the country, creating capacity and competition for telecom
services to zero import duty on software are some of the steps taken for this
industry to develop as the leading global sourcing hub of the world.

The phenomenal growth can be attributed to only some states and regions
like Karnataka, Andhra Pradesh, Maharashtra, Tamilnadu, NCR. This skewed growth
is a consequence of these states being proactive and coming forward with a
variety of incentives like capital subsidy, reimbursement of stamp/ transfer
duty, registration fees and patent filing costs, exemption from statutory
power cuts and industrial tariff instead of commercial, waiver of NOC from
Pollution Control Boards, Simplification of Labour Laws, Additional
Floor Space Index, venture funding and special incentives to start up
companies, recruitment assistance, etc. The states which had allowed
setting up of private engineering colleges in 1990s had the advantage of availability
of human resource.

Exports

The exports revenue of Indian IT-ITeS industry has grown from US$
4 billion in FY 1999-2000 to US$ 69 billion in 2011-12. The export industry is
diversified across three major focus segments – IT Services, BPO and
engineering services. While IT Services have been the mainstay of the industry,
BPO and engineering services sector has built upon India’s value proposition
and today there exist integrated service providers across the three focus areas
as well as niche providers.

Employment generated

The direct employment of IT-ITeS industry has increased from
0.52 million in the year 2000-01 and has reached 2.8 million in FY 2011-12.
About 2.28 million jobs have been generated during the last decade. This also
translates to the creation of about 8.9 million indirect job opportunities in
diverse fields such as commercial and residential real estate, retail,
hospitality and transportation, etc. IT-ITeS/BPO industry provides employment
to people with various skill levels i.e. Engineers, Lawyers, Arts/ Science/Commerce/
Literature etc. graduates; High School Pass outs etc. With 30 percent women
in the workforce this sector is the largest employment provider for women.

The Path Ahead

The domestic IT-ITES industry in India is at an inflection point
today. As Indian consumers and corporations rapidly adopt mobile phones, and
Internet access and broadband connectivity expand, there is likely to be a significant
increase in spend on IT hardware, software and services. Finally, the biggest
domestic opportunity in most sectors (e.g., banking, insurance, retail, telecom
and healthcare) lies in tapping the opportunity to serve the billions of underserved
at the bottom of the pyramid.

The other big positive is that our knowledge sector is largely driven
by youth—the average age of employees in the industry is between 25 and 28.
The basis of the “demographic dividend” is that in 2020, the average
age in India will be only 29 years, compared with 37 in China and
the United States, 45 in Western Europe, and 48 in Japan. Moreover, 70 percent
of Indians will be of working age in 2025, up from 61 percent now. According to
the Indian Labour Report, 300 million youth would enter the labour force by
2025, and 25 per cent of the world’s workers in the next three years would be
Indians. India’s young demographic profile, where over 3.5 million graduates and
postgraduates including over 500,000 IT & Electronics & Communication
Engineering graduates are added annually to the talent base, will continue to
give us an unassailable edge. Today, no other country offers a similar mix and
scale of human resources.

Department of Electronics and Information Technology (DeitY) has recently introduced a new IT Investment Regions (ITIR)
Schemes to develop infrastructure facilities in Tier II and Tier III cities.
Few states have already shown strong interest and have begun taking steps to
set up such ITIRs.

DeitY has formulated National Policy on IT which aims to maximally
leverage the power of ICT to help address economic and developmental challenges
the country faces. The National Policy on IT focuses on application of technology-enabled
approaches to overcome developmental challenges in education, health, skill development,
financial inclusion, employment generation, governance etc. to greatly enhance
efficiency across the board in the economy. The policy seeks to achieve the
twin goals of bringing the full power of ICT within the reach of the whole of India
and harnessing the capability and human resources of the whole of India.

Twelfth Five year Plan (2012- 2017) Objectives

The main aim is to harness the potential of the software and services
sector to contribute to the country’s development and growth, particularly in
terms of investment, exports, employment generation and contribution to GDP; to
retain India’s leadership position as a global IT-BPO destination, consolidate
and grow in both mature and emerging markets.

1. Enhance innovation and build India as the hub for global
design, IP and product development.

5. To focus on development of ITITeS/ BPO industry beyond the
current 7 Metros including NCR which account for 90 percent revenue.

Targets

Over the next decade, several global mega trends will shape the
technology and ITeS/BPO industry as they reshape the global economy. Hence with
increased GDP growth of emerging markets, and shrinking working age populations,
these megatrends will present a new set of hitherto untapped opportunities that
will include emergence of new verticals, service lines, geographic and customer
segments. On the back of these trends, the addressable market opportunity for
the IT-ITeS/BPO sector is likely to expand from the current USD 500 billion
to USD 1.5 trillion by 2020.

The goals identified to achieve the aspirations are as under:

Given the backdrop of large untapped demand potential and strong
fundamentals, India is uniquely positioned to secure global leadership, grow
its ITBPO exports at a compounded annual rate of 13.8 percent, and generate
export revenues of USD 130 billion, and domestic revenues of USD 40 billion by FY
2017. Direct employment generation is expected to increase by 65 percent from
FY 2011 levels, to 4.2 million, while indirect employment is expected to touch
10.6 million by FY 2017. This translates to incremental direct employment

of about 1.4 million people and incremental indirect employment of
2.3 million. Attaining these ambitious outcomes will require breakthrough collaboration
amongst central and state governments, industry players and industry
associations.

Key constraints and
Challenges

The future growth trajectory will depend on how these are
tackled.

1)Competition and strong
pull from other countries: China, Phillipines, Vietnam, Poland, Hungary,
Mexico, Brazil and Egypt is an indicative list of countries that are emerging as
competitive locations, with this increasing to almost 50 locations. Many of
these are offeringhost of incentives posing a danger that some
of these locations can transform into primary sources. China is intent on
transforming from a manufacturing engine into a services hub. As the industry is less capital intensive and flexible it can
be relocated in a very short time. The goals identified
to achieve the aspirations are as under:

2)Reduced competitiveness of
the industry due to diminishing employable talent pool, rising costs due to concentration
in Metros and inadequate infrastructure in other towns.

3)Improving the supply and
capacity of suitable talent as industry has to spend + 1.5 percent of its
revenues on training to make them employable.

4)Lack of early stage and
angel funding

5)Global Economic Recovery
as this industry’s mainstay is exports with USA and UK accounting for75-80
percent

6)Direct and indirect
protectionism in key markets.

7)Transparent, stable and
uniform fiscal and labour policy structure

8)Need for Made in India
procurement by Government

9)Lack of research resulting in significant usage of imported IPR

Strategies

Build an enabling policy environment for India to sustain and
grow its leadership in the global sourcing sector in developed and emerging
markets. To support small and medium enterprises and provide competitive edge
through fiscal benefits, innovation fund and incubation.

1. To build world class infrastructure in identified tier II and
tier III cities to create new hubs for industry development as potential
centers of excellence.

2. To address the gap of employability through skill development
initiatives.

3. Some of the recommendations relating to IT-ITeS industry
would cut across the other sub-groups of DeitY for the twelfth plan and also
come under the purview of other Ministries/departments (viz, MHRD, DOC, MEA,
MSME).